courtesy : Tax Technology
Taxation of digital goods
Digital goods are software programs, music, videos or other electronic files that users download exclusively from the Internet. Some digital goods are free, others are available for a fee. The taxation of digital goods and/or services, sometimes referred to as digital tax and/or a digital services tax, is gaining popularity across the globe.
The digital economy makes up 15.5% of global GDP in 2021 and has grown two and a half times faster than global GDP over the past 15 years, according to the World Bank. Many of the largest digital goods and services companies are multinational, often headquartered in the United States and operating internationally. There are significant differences in corporate tax rates between countries, and multinational companies can legally use base erosion and profit shifting (BEPS) to report their profits against intellectual property held in low tax jurisdictions (tax havens) to reduce their corporation tax liabilities. This has led to many new legal and regulatory considerations. In the field of international taxation, there has been debate about whether the current rules are appropriate in the modern global economy, especially regarding the allocation of income and profits among countries and the effect of this on taxes paid in each country.
Almost 50 jurisdictions have made changes in their current legislation regarding the taxation to include the digital tax, or presented new laws focused on taxation of digital economy.
Reform to the international tax system
In 2013, the Organization for Economic Cooperation and Development (OECD) began a project to examine base erosion and profit shifting (BEPS) of multinational companies (MNCs), with aim to create a single set of consensus-based international tax rules. In 2015, G20 Finance Ministers agreed a series of recommendations for setting minimum standards in national tax systems, revising international standards for the way those systems interlock, and promoting best practices. Under the auspices of the G20, an interim report was made in March 2018. In June 2019, G20 Finance Ministers agreed proposals drawn up by the OECD to find a consensus-based solution by the end of 2020. Later that year, the OECD launched a two-part consultation: first, proposals for determining where tax should be paid and on what basis (‘nexus’), as well as what portion of profits could or should be taxed in the jurisdictions where clients or users are located (‘profit allocation’); and, second, a proposal for a ‘global minimum corporate tax level’. In October 2020, the OECD announced that it expects an agreement by mid-2021. The agreement was endorsed by the G7 Finance Ministers in June 2021.
National digital services taxes
In the meantime, several countries led first by the European Union have begun to propose and implement digital services taxes (DSTs) which have a number of aims: to raise tax revenues; to put pressure on other countries – in particular the United States – to reach an agreement; and, arguably, to create a level playing field until the OECD/G20 framework reaches an agreement or comes into force. Public debate in many countries has asked whether Big Tech companies are paying too little tax.
These national DSTs are mainly aimed at a small number of large digital companies that meet a worldwide revenue threshold and a domestic taxable sales threshold. In practice, most of these companies have their headquarters in the United States. The DSTs that have been proposed or implemented have similar characteristics and almost all were announced to be temporary measures. They are a mix of gross receipts taxes and transaction taxes that apply at rates ranging from 1.5% to 7.5% on receipts from the sale of advertising space, provision of digital intermediary services such as the operation of online marketplaces, and the sale of data collected from users. The attribution of revenue to a jurisdiction is generally based on whether the taxed service is viewed or enjoyed by a consumer on a device located in the jurisdiction based on its IP address or another geolocation method. Some countries have adopted various exemptions to the DST, including for payment services, digital content, and intragroup services.
Criticism
Digital services taxes have been criticized for a number of reasons including: distorting market behavior by discriminating primarily against large U.S. MNCs and therefore providing a relative advantage to other countries’ businesses that fall below the revenue threshold; taxing a business input that will likely be passed on to consumers (even though some jurisdictions, like France, have stated that consumers should not absorb the tax, several companies have already announced that they would increase their prices because of these DSTs); and, lack of harmonization in the application of these taxes which may result in double taxation if, for example, two or more countries tax the same revenue stream.
